We're Too Much into Debt

Floridians are upside-down in mortgages, and everything else.

Figures from First American CoreLogic, a California firm, indicate that overall nearly a third of Florida mortgage holders are now “upside-down” — they owe more on their homes than they could get from selling them.

Some of the inverted deserve little sympathy. Many are speculators who tried to cash in on flipping houses but stayed too long at the trough. Others turned their homes into ATMs, borrowing excessively while expecting naively that the homes would continue to appreciate indefinitely.

But most probably are people who were just looking for a place to live and who are now stuck with lousy options until housing prices rebound. I have been upside-down myself and know the feeling. In the late 1980s, while living on Long Island, I bought a house at the peak of a boom market. I was looking to dwell, not speculate. Six months later the market had collapsed, and my house was worth about a third less than what I had paid. It got worse. A few months after that, with the market still dead, I needed to move. Upside-down, I faced choices that included handing over the house to the bank or selling it at a loss and having to write a huge check to the mortgage company at closing. A third strategy worked better: I became a long-distance landlord for several years, losing a little money each month on the difference between what I got in rent on the house and what I paid on the mortgage. Eventually, the market rebounded enough that I was able to sell the house and more or less break even.

The experience was awful, but the market proved out. Once overheated, it got bad for a while, and then it got better. Homes are assets, and asset values go up and down in free markets. In time, the same thing will happen for upside-down Florida home buyers. Prices will begin rising again — at more traditional rates of appreciation — and in a year or three those who bought at the peak are likely to be back at break-even.

Of much more concern than these temporary ups and downs in the real estate market is the degree to which all Floridians, and all U.S. citizens, are on the way to being upside-down in a more profound and frightening way. There are, as Boston University economics professor Larry Kotlikoff believes, “strong reasons to believe the U.S. may be going broke.”

Since the 1990s, there’s been growing awareness among some of the “fiscal gap,” the difference between the fiscal commitments the U.S. has taken on — including debt service, Medicare and Social Security obligations — and future tax receipts. Measuring the gap is an attempt to put a current value on the burden that future generations will bear for decisions on spending and taxes that we’ve already made.

Both the Clinton and Bush administrations censored “generational accounting” studies for their own political reasons. The authors of a detailed 2002 study commissioned by then-Treasury Secretary Paul O’Neill have continued to update the gap number, which has reached the unimaginably large sum of $65.9 trillion — five times U.S. GDP and twice the size of national wealth, Kotlikoff reckons.

Frame that obligation in terms of the tax and spending policies required to meet it, and the implications are staggering: One way would require “an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent,” Kotlikoff wrote in an article published by the Federal Reserve Bank of St. Louis.

Kotlikoff presents figures showing that the average lifetime net tax rates that a 20-year-old worker already faces are upward of 40%. Doubling those tax rates to meet the gap, he says, would create catastrophic disincentives to work and save, particularly for the nation’s best-educated citizens.

Note that Kotlikoff wrote the paper before the government’s trillion-dollar leap into the financial market. The long-term implications of that jump aren’t even beginning to be understood, but it’s hard not to think that the current impacts of the over-leveraging of the private sector aren’t some kind of harbinger for what things will look like when the government’s super debt starts to come due.

For me, the fiscal gap ought to be the backdrop against which all policy initiatives by President-elect Barack Obama must be considered. Obama’s ability to transcend the most intractable American problem — race — and re-engage the spirits of young and old alike in the American Dream is extraordinary. But the dreary, brutal arithmetic of the economy may be a much tougher foe than cynicism and even racism. Steering the country on a course toward national health insurance, for example, without policies that will fund it adequately and control its growth definitively will be madness. And trying to devalue the $65.9 trillion obligation by printing money — a likely Democrat response — could lead to Weimar Republic-style hyperinflation.

I don’t want my teenage children entering their prime earning years financially crippled by having to pay debts that my parents and I made. It’s morally and economically wrong to leave them an upside-down country, one that owes more than its assets are worth. Beginning to get things right-side up is the most important job Obama will face — and a balanced budget with a surplus by the end of his first term would be an ambitious but worthy goal.

As the recurring real estate booms and busts in our state reflect, there is always a great deal of uncertainty in the economy and in economic projections. But, as Kotlikoff says, “economic resources are finite, and the government must and will ultimately make someone pay for what it spends.”